Editorial by Angel Gurría, OECD Secretary-General

8 December 2010

We cannot afford to delay action on climate change. Countries need to act and the meeting in Cancun provides an opportunity to be ambitious in this field. It also provides the leverage to overcome domestic political hurdles and agree on a common multilateral framework with specific commitments.

Indeed, funding issues can be overcome. OECD research suggests that if industrialised countries used auctioned tradable permits or carbon taxes to achieve the emissions reductions they announced in the Copenhagen Accord, they would raise up to 1% of GDP, or US$ 400 billion, by 2020 (i).

A small part of this amount would already provide a significant contribution to the long-term financing that is needed to fight climate change. Effective approaches to reducing emissions would cost just a fraction of a percentage point of GDP per year and offer good returns - new opportunities for investment, innovation, efficiency gains and markets. These opportunities offer a win-win-situation for advanced, emerging and developing economies alike.

Developing countries will be hit hardest by climate change and are the least able to pay the bill. That’s why rich countries agreed at last year’s climate change summit in Copenhagen provide new and additional resources – US$ 30 billion over the period 2010-2012 and a longer-term goal of raising US$ 100 billion per year by 2020 from public and private sources.

Public finance can jump-start the engine, but private investment in low-carbon infrastructure and low-carbon solutions will be crucial to keep it running. This does not necessarily mean new financing, but instead shifting private investment patterns from “dirty” to “clean” investments. Leading companies are already adopting green strategies. By using less energy, Dow Chemical saved US$ 4 billion over 11 years while DuPont saved US$ 3 billion over 15 years. It’s good business and ‘going green’ can help them be more competitive (ii). But governments must give the private sector new, long-term incentives to invest in low-carbon infrastructure and technologies. Without clear policies, there is a real danger of “rollback” by the front-runner businesses.

Market-based instruments to put a price on carbon can help contain costs, spur innovation, and raise revenues. Our research shows that carbon markets and taxation can play a key role (iii) in efforts to reap full policy benefits in economic and environmental terms. An obvious first step is to cut the subsidies that currently support fossil fuel production and consumption. This would have a two-fold positive impact – it would help countries meet both their climate and their development objectives. Subsidies to fossil fuel consumption in developing and emerging economies are estimated to cost more than $300 billion per year. That’s a lot of money, and unfortunately today most of it is subsidising wealthier people’s petrol and electricity bills rather than the needs of the poor. OECD analysis shows that removing these fossil fuel subsidies would free up precious government funds, increase economic efficiency and reduce greenhouse gas emissions by 10% in 2050 compared with business-as-usual. G20 leaders have rightly made this win-win-win outcome a priority.

Beyond finding the source of finance, we have to track funds in a transparent and consistent manner and ensure that receiving countries have the capacity to use it effectively. For almost a decade the OECD has been tracking donor financing for climate change and now we also look at financing for adaptation. In 2008, we estimate bilateral flows for climate change amounted to USD 8.7 Billion (iv). We are now working to establish systems for tracking future low-carbon foreign direct investment.

To sum-up, Green and Growth can and should go together, but we need to put the right policies in place. The OECD is working to help countries reconcile fighting climate change with strengthening the economy and creating jobs.

 

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(i) Costs, Revenues and Effectiveness of the Copenhagen Accord Emission Pledges for 2020 (2010), available: http://www.oecd.org/dataoecd/6/5/45441364.pdf

(ii) Transition to a Low-carbon Economy: Public Goals and Corporate Practices (2010), available: http://www.oecd.org/document/54/0,3343,en_2649_34889_46280502_1_1_1_1,00.html
 

(iii) Taxation, Innovation and the Environment (2010), available: http://www.oecd.org/env/taxes/innovation

(iv) OECD Development Assistance  Committee - Creditor Reporting System (CRS), available: http://www.oecd.org/dac/stats/data